The question of who pays a decedent’s unsecured debts, like a credit card balance, comes up with almost every estate administration. There are some very specific rules on how this works. Please keep in mind, this is meant as a high-level overview to provide some general information, not a detailed discussion.
1. Who is responsible for payment of the decedent’s debts?
The decedent’s estate is responsible for paying the debts with the decedent’s assets. The person in charge of this is the estate’s Personal Representative (the “PR”) appointed by the Probate Court when probate for the estate is opened. No one else can access the decedent’s assets to pay any debts.
2. How does the PR find out about the decedent’s outstanding debts?
Hmmm. . . . good question. If the PR has been helping the decedent with his/her finances, then the PR should have a pretty good idea of the overall financial situation, including outstanding debts and bills. If not, you often just have to watch the mailbox because, eventually, a bill or request for payment will show up.
3. When there is a bill or request for payment, does the PR just make the payment?
In many cases, NO, the PR should not automatically pay any bill or request for payment that shows up. There is a whole legal court process that a creditor must go through to validate the debt for payment.
To validate the debt, the creditor needs to file a claim in probate court. Once the claim is filed, the PR has the opportunity to object to the claim. Maybe the PR doesn’t think the decedent owed this debt when he/she died. Maybe the claim doesn’t have enough detail to show the PR that this was, in fact, the decedent’s debt.
For instance, very often a credit card company will file a claim for an outstanding balance. But, the paperwork filed by the credit card company often just shows the total amount. The PR can object to the claim wanting to see more detail. How does the PR know that someone else didn’t use the card? Maybe it was credit card fraud. If the PR files an objection, the probate court will set a hearing on the validity of the debt. If the credit card company does not send an attorney to the hearing to represent them, then the claim for the debt is dismissed, meaning the credit card company does not get paid.
Now, this is not to say that people shouldn’t have to pay their bills. But, there is a legal process that has been established to protect an estate and make sure that only valid debts of the estate are paid. If a creditor is unwilling to go through the process, that is their choice.
4. How long does the family have to worry about someone presenting a bill or request for payment?
There are time limits to how long an estate needs to wait for debts to be presented. The point is that families should not have to sit around for years waiting to see if someone pops up with a claim that Dad owed them money.
First, there is a 4 month period for “known” creditors. The PR is supposed to send each known creditor (you know Dad had a VISA card, thus the creditor is “known”) a notice that the decedent has died. The creditor has 4 months from the time it received the notice (you mail the notice with a return receipt request so you get the little green card back showing when it was received). If a creditor who received notice files its claim in probate court after 4 months from when it was received, it will be rejected. For “unknown” creditors who did not receive the notice, they have 1 year from the date of death to file their claim in probate court.
5. What happens if the debts owed exceed the amount of assets in the estate – are the children responsible for paying the debts?
The second part of the question is probably the one we get asked the most. The answer is no. Children, or any other beneficiary, do not use their own assets to pay off a decedent’s debts. Only the decedent’s assets are available to pay the debts.
If the estate does not have enough assets to pay all the debts, it is considered an “insolvent estate” and the estate assets are divided up among the debts proportionally. This also means that an insolvent estate has nothing left over for the beneficiaries.
6. When is a debt not a debt? When it is a fee or expense of the administration?
This process of paying the decedent’s debts is only applicable to debts that existed at the time the decedent died. This process does not apply to fees or expenses that arise as a result of the administration of the estate. Fees and expenses incurred for the estate’s administration can be paid directly by the PR without the need for a claim to be filed (except attorney’s fees – these often need to be approved by the court before payment).
For example, the PR hires an accountant to help prepare the decedent’s final tax return. That is an expense incurred from the administration of the estate and can be paid directly. But, a past-due bill to the same accountant for unpaid fees from last year’s work before the decedent died would be a debt that has to go through the claim process.
Get Help with Questions About Estate Planning
As we mentioned above, this process deals with the payment of unsecured debt. Secured debt is an entirely different story because the repayment of the debt is guaranteed by some asset that the decedent pledged as collateral to the debt.